China Extends Crypto Crackdown, 9/24/21: Implications for Miners on Rig Availability and Pricing, Global Hashrate & Transaction Fees

China expanded the ongoing crypto crackdown today. This includes enhancing enforcement against illegal mining, as well as prohibiting all financial transactions involving crypto. The central bank also announced that any trading, order matching, token issuance and derivatives on cryptocurrencies are illegal, including services offered by overseas entities made available within mainland China. The bank explicitly excluded the digital yuan (eCNY) from this list, while naming Bitcoin and Ethereum as examples of banned tokens.

This action is consistent with our assessment that China’s motivations are enforcement of capital controls, and control more generally. The ability to convert RMB into Bitcoin ASICs, and thus into BTC and other crypto or fiat currencies, is the threat Beijing is seeking to mitigate.

These actions have broader implications for the global Bitcoin network, particularly miners. A significant number of Chinese miners were either secretly plugging rigs back in, or hoping to find a way to do so. At the same time, we believe rig makers such as Bitmain and MicroBT were moving more rig assembly to their existing plants in Malaysia and Thailand, to bypass physical production in China. However, much of their engineering and design work is still based in China.

We examine some of the scenarios here:

•Rig pricing: In the near term, some of the rigs held in China in the hope of plugging them back in could make their way out and into the global secondary market. Future deliveries to Chinese nationals who were seeking receipt at sites outside China might also face cancellations and/or inability to pay the remaining balance on those rigs. This could result in improved rig availability and lower prices for miners in the West.

•Rig Production: A crackdown on the rig manufacturers appears to us as likely, although far from certain. While production — and most of the supply chain — can bypass China, the major rig makers are domiciled in China. Senior leadership (which may or may not be able to relocate out) as well as the bulk of the engineering talent (who are much less likely to be able to relocate) are Chinese nationals, based in China. A manufacturer crackdown could impact rig availability if production is disrupted, and slow the pace of innovation and technological advancement. This could result in lower availability and higher rig prices, but may take some time to play out.

•We see a compelling window of opportunity for emerging, non-Chinese ASIC designs.

We asses this crackdown could slow the growth of global Hashrate: in the near term, by driving Chinese rigs offline and slowing the restart of existing rigs, and in the longer term as well, by impacting the availability and pace of technological innovation in the rig space. Ultimately, we expect non-Chinese designs to step in and take advantage of the void, should the Chinese manufacturers get shut down.

An abrupt shut down of Chinese rig makers could be extremely disruptive for the global mining industry, given all the deposits paid to them for future deliveries that may be at risk.

Finally, we view this as a continuation of the downward pressure on transaction fees. We believe a large percentage of crypto transactions in Asia are on-chain, whether as a direct peer to peer transfer, or an on-exchange transaction followed by a transfer to a personal wallet. This is in contrast with the West / developed markets, where we assess most transactions take place on-exchange, with the tokens held “in street name”. The broadening Chinese crackdown on crypto financial services could therefore result in a growing divergence between on-exchange and on-chain transaction volume, thus lowering network congestion and the fees needed to process transactions.

Takeaways

•Rig pricing is likely going to be volatile, until the market resolves between the different possible scenarios

•Global Hashrate could see slowing growth

•Transaction fees could head lower as well

•We will update our analysis as we get more clarity into the possible outcomes